Tata Sponge: As cheap as it can get

Tata Sponge is the producer of Sponge Iron (an intermediate component towards production of Steel). It has capacity of 390kt of Sponge iron and 26MW of waste heat based recovery power plant. It main raw material are Iron ore (1.6x) and Coal (1.2x). It procures iron ore from Joda mines (Tata Steel) at arms length basis whereas coal is mix of e-auction and imported. Raw material is ~85% of the cost of production.

1. At FY13 end it has cash of  INR2.34 and INR1.26b for current investments. Therefore on per share basis it has INR233/share of cash + liquid investments. 
2. INR1.7b towards loans and investments with ~INR1.6b towards coal block development. Bank gurantee of INR325m has been deducted by the government due to delay in start of coal mine which is currently under litigation (contingent liability). So effectively INR103/share towards coal block of which INR21/share is bank gurantee. This effectively means after removing BG, it still has put INR82/share in the coal block ( which is mostly on land acquistion) of which ~INR50/share has been disbursed so far. 

Scenario 1: Coal block gets necessary approval and starts: Coal block will mean 0.5mt of  captive coal per annum which will replace external coal. Assuming savings for INR2000/t this will mean INR1b saving pre tax or INR0.67b post tax.  Total share 154m giving INR43/share EPS push. So effectively EPS should go upto ~INR100/share once coal block starts taking current profitability into account. At 6x PE (quite reasonable for any company) it should trade at INR600/share.
Scenario 2: Coal block is scrapped and company recovers only half of its investments in the block (i.e non disbursed amount for land acquistion). So it will have INR233/share + INR50/share of liquid assets ~INR283/share same as current MCap. Apart from it, its existing business without any raw material support continues to generate INR1b of EBITDA. Giving 3x to EBITDA (quite reasonable) give EV push of another INR3b. Therefore INR194/share to the valuation taking total value to INR477/share.

 Amazinlgy without any positive development, if stock price doesnt improve Tata Sponge will start trading at negative EV within one year. 

Negatives: Dividend payout has been quite low considering limited capex needs for the company. At INR8/share it is just ~16-17% payout ratio. This low dividend payout leads to destruction of value for shareholders. This has been problems with the companies like NMDC, Hindustan Zinc, Coal Inda and Cairn India. As this cash is being invested with 8-8.5% of yield which also attracts full tax rate of 33% meaning effectively yield of 5-5.5%. If the cash is given out as 100% payout, this will mean that even if I invest it at 8-8.5%, and my tax rate is usually lower than the company rate thereby lowering tax outgo at my end. Anyway my investments in the company is an equity investments and any amount extra should be distributed to me rather than being diverted to debt instrument (i could have directly applied for the same). 


So two big triggers for the company: coal block operations and increased dividend payout.  

Disclaimer: I do own certain shares of the company

Fluidomat: A value play

Fluidomat: A value play
Fluidomat is the manufacturer of fluid couplings, a devices which is used to transfer power from one part of machine to another smoothly. It is used in wide array of industries such as power, steel, mining, automobiles among others.The company is based out of Dewas, near Indore. As per its website it has been in existence since 1971. However company has been loss making in early 2000s but significant investment in its user industry such as Steel, Power, Mining in last decade turned around the fortunes of the company. With improved cash flows company was able to get rid of debt, then resorted to increasing cash balance and capex, and is now in comfortable position and has improved dividends. The company has also undergone capex to increase capacity. The stock has already run up in prices in last 3-4 years with changing fortunes to match the turning fundamentals. Next big triggers for the stock, revival of Indian capex cycle and increased capacity. Even based on current parameters stocks is available at reasonable valuations

Link to the company website: http://www.fluidomat.com/

Positives

1. Stable operating margins: Average EBITDA margin of 17.5% in last 10 years. Never dipped below 14.5%.
2. Expected EPS of ~INR10/share. At 49 it trades at TTP P/E of 5x.
3. Sales CAGR of ~20% in last 10 years although it will be lower teens in FY13.
4. Dividend payout of ~20% since last 2 years indicates positively for the management. Usually small caps or for the matter many midcaps have terrible record of being fair with minority shareholders.  Dividend payout shows management intent to be alteast have some fairness towards minority.
5. Zero debt company. At 1HFY13 end it got rid of its entire debt. 
6. Promoter have been progressively increasing stake from 32% in FY08 to 52% in FY13.
7. INR13m capex just near completion while moving to another INR20m capex which can be done using internal cash flows. This could provide sales growth momentum going forward.

 Negatives

1. Business not scalable as market very niche and small operations.
2. Market cap too small to interest institutional investors. Total free float MCap is just INR120m

Disclaimer: I do hold certain number of shares in the Fluidomat

How does fluid coupling actually work?
Very good video on its working, although bit old but explained superbly.